By DAVID MOON, Moon Capital
August 12, 2001
Each year, the US Army packs thousands of parachutes for use by its soldiers
around the world. These chutes are packed by men and women who are
specialists, trained precisely for that mission. After each chute is
packed, the specialist signs a tag affixed to the pack. Another specialist
then checks the chute and also signs his or her name to the work. Here is
the best part: at least once each month, an Army supervisor will instruct
a packer or checker to leave the work station with the chute he just completed
packing, go directly to a waiting airplane and jump with that parachute.
The packers never know when this will happen, but they know it will
happen. They must be willing to jump with any parachute they pack.
Sounds like pretty good quality control.
The investment industry could learn a thing from the Army.
The very first question an investor should ask a potential advisor is about
his own investments. Does the advisor eat his own cooking? If not,
Registered investment advisors must complete a Securities and Exchange
Commission disclosure document, detailing business practices, history,
processes, fees and other information. One of the questions on the form is
whether or not the advisor also purchases for herself securities she recommends
to clients. The tone of the question suggests this particular practice is
a red flag. In fact, the opposite is true.
On our disclosure document, we proudly indicate that we do buy for our
own accounts securities we recommend to clients. In fact, most of our
employees' personal wealth is invested in a fund we manage, identically
alongside our clients. This is a bad thing?
Of course, it would be a bad thing to buy the same securities as your clients
if the advisor was buying or selling his stock at better prices than his
clients. That defeats the purpose of forcing a manager to jump with a
chute he just packed. 'Let's wait and see if the chute opens before
deciding whether to put a client in it or wear it myself.'
CNBC commentator, Jim Cramer, last week noted that on many occasions,
'analysts' on television strongly recommend a stock to viewers at the same time
they were trying to sell it themselves. If that has happened, the network
should tell the viewers and disclose the names of the offenders. The SEC
should purchase full-page ads in the Wall Street Journal telling investors of
these specific acts of malfeasance. 'The following firms take advantage of
their clients and have a demonstrated and proven willingness to screw their
clients if there is enough money involved and the odds of getting caught are
low.' That would be an effective SEC disclosure.
After years of standing on my soap box about the Wall Street analyst
industry, the issue is finally more popular in the mainstream. CNBC now
asks its guests if they own the stocks they tout on air. The analysts
proudly and smugly uniformly reply, 'no.' The CNBC commentators then
continue with their interview, comfortable in the ethics of the situation.
Instead, I want Liz Claman to ask an analyst why he DOESN'T own a stock he
recommends as a good buy. Then I would ask if the analyst ever owned the
stock. That might be interesting. Did the analyst used to own it,
but sold it? At what price? And now he is recommending it to viewers
and clients? And if the analyst/manager still owns that stock, I want to
know when he bought it and what he paid for it.
One of the conditions of going on television (or into a client meeting) and
making an investment recommendation should be that a supervisor can walk around
and occasionally force the investment professional to immediately buy a bunch of
whatever he is recommending at that moment. Make 'em jump with their own
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).